Small business owners are protected under consumer credit laws, but their businesses are not offered the same protections.
Consumer Credit and Business Credit Are Different
While it may seem like an obvious statement, it is important to understand that consumer and business credit are very different. Consumers are entitled to a number of protections related to fees, changes in the interest rates, or other terms of the credit agreement, as well as protection against fraud.
However, the Federal Reserve is very clear that these same rules do not apply to businesses. On the Federal Reserve website there is a note that says, “Credit cards issued primarily for business or commercial purposes generally are not governed by the consumer protections in the Truth in Lending Act or the amendments to that act in the Credit Card Accountability, Responsibility, and Disclosure Act of 2009.”
Banks may choose to offer similar terms to businesses and consumers, but they are not obligated to. It is very important for a small business owner to read all disclosure documents related to a business credit account, and to never make assumptions that the terms will be similar to what they are familiar with as consumers.
Consumer and Business Credit Scores Also Differ
The differences extend to all aspects of credit, including credit scores. Consumer scores are generally scaled from 300 to 850, while business scores may use a scale from 1 to 100. Business credit scores are calculated with complex algorithms designed to reward companies that pay invoices before the due date. Scores above 80 usually indicate that a company pays early.
Just as with documents related to credit accounts, small business owners should understand that business credit scores are in many ways different than consumer credit. There is at least one similarity between the two types of credit. By understanding their credit scores and knowing what is in their credit report, both consumers and small businesses will generally find it easier to navigate the credit application process.